Introduction
Electronic payment processing systems play a critical role in modern economies by providing merchants and customers with efficient methods for conducting transactions. Leading customer-to-business payment systems include cash, credit cards, debit/ATM cards, and checks. Banks and companies that offer payment instruments (issuers) can derive revenue from interest, fees, and penalties charged to customers and merchants. In general, credit cards and other payment methods with higher fees or customer interest rates are the most profitable for issuers.
Banks issuing credit cards and other payment instruments can increase revenue by either increasing the number of income earning accounts or by increasing the income per existing account.
The traditional methods for adding new accounts include but are not limited to direct customer solicitations and portfolio acquisition. Both methods are costly, entail a level of risk associated with the unknown and considering the initial investment necessary, have limited capability in the short term to impact net profitability. Additionally the long-term success of either depends on the issuer's ongoing ability to manage these new accounts in a profitable manner.
Methods used for income enhancement for existing accounts include additional or increased account management fees for new or existing services, penalty fees for improper account or instrument usage and interest rate manipulation. Although these methods can be effective, the acquisition process is highly competitive and fee increases may cause a loss of customer loyalty thereby reducing the instruments use and potentially loss of the customer account, both of which impact long term portfolio profitability. Additionally, if fees and interest rates appear to be excessive, regulators and card associations may intercede on behalf of consumers, and cap these charges.
An alternative or complementary way to increase revenue is to increase transaction volume on current credit card accounts. As a result, competing issuers are increasingly seeking ways to increase the use of, and loyalty to, their cards. Reward programs are one commonly used method for encouraging customers to use a particular issuer's cards. Examples of reward programs include frequent flier miles offered by some credit cards, the cash rebate offered by the Discover card, and the reward programs described in U.S. Pat. No. 5,025,372 to Burton et al., in U.S. Pat. No. 6,018,718 to Walker et al., and in U.S. Pat. No. 6,009,412 to Storey. Although reward programs can attract customers and increase transaction volume, they are costly and relatively inefficient. As a result, issuers will provide rewards for some unprofitable transactions, fail to attract some transactions that would be profitable, and may cause some marginal accounts to default by encouraging over-use of credit.
Methods for applying merchant incentives (and other transaction modifiers) at the point of sale are also known, but these are generally used by merchants to encourage customer purchases. For example, U.S. Pat. No. 5,945,653 to Walker et al. describes a variety of methods whereby a merchant and a credit card issuer can implement systems to allow transaction-specific discounts. The Prio service operated by Infospace.com also allows merchants to provide discounts to customers. The cost of such discounts would generally need to be borne by the merchant. The issuer has little incentive to contribute to the incentive because the issuer derives relatively little benefit by discounting transactions that would occur anyway. (The possibility of increased transaction volume is not worth enough to justify a significant issuer-funded incentive.) Furthermore, establishing and maintaining the system such as the one described in '653 would be extremely expensive and complex, particularly if each merchant must negotiate and manage a separate relationship with each issuer and/or customer.
Payment Systems
A variety of payment mechanisms are currently in widespread use. Conventional cash is straightforward, but both inconvenient for most transactions and is irreplaceable if lost, stolen, or destroyed. Impulse purchases cannot be made using cash unless the customer happens to be carrying enough money to cover the cost of the transaction. Cash can also be counterfeited, either causing the accepting party to lose the transaction amount or devaluing the currency as a whole. Because transporting cash is risky and slow, it is difficult to use for Internet or mail-order purchases without relying on (expensive) cash-on-delivery options offered by some package delivery services. Although the costs associated with handling cash are relatively low, they are non-negligible due to the risks described above.
For customers, checks have several advantages over cash because they are non-negotiable before they are signed. (In most cases, the account holder is not liable if the signature on a check is forged.) In addition, they can be used for impulse purchases of any amount, provided that the customer has sufficient finds to cover the purchase. Fees for clearing checks are generally low, but merchants usually bear the loss if a check is disputed prior to account clearing, e.g., if the funds in the customer's account are insufficient to cover the payment. As a result, checks are generally not accepted for high-risk transactions. Compared to electronic transactions, checks are slow to mail and clear, making them awkward for mail-order and Internet purchases.
Techniques for improving check-based transactions include check guarantee cards so that merchants can verify the validity of a check at the point of sale, electronic check clearing networks (such as NACHA), account or customer activity or black lists (such as Telecredit) and electronic methods for allowing check payments without exchange of a paper check. Use of paper instruments is incompatible with the non-face-to-face transaction as exemplified by mail or telephone order and Internet based transactions. Although potentially important, the implementation of electronic check substitutions is not yet widespread, and the historical fear of account misuse may pose a significant obstacle to customer acceptance.
Credit cards and many other kinds of payment cards have several important benefits over checks. With credit card transactions where the card is present at the point of sale and the payment is authorized by the issuer, the merchant is usually guaranteed to be paid—even if the card is invalid or stolen or if the customer fails to pay his/her account balance. (The major exception is that the merchant is usually held completely liable for the transaction if there is no signature on the draft or a PIN was not used tQ consummate the payment.) Credit card numbers can be exchanged over the telephone, allowing almost instantaneous mail-order and Internet transactions. Credit card users are generally extended a credit line, allowing impulse purchases that exceed their available cash while providing issuers with a source of revenue from interest charged on outstanding balances. Merchants accepting credit cards are charged a relatively high discount rate (typically between 1.6 and 4 percent), making credit cards more expensive to process than most other payment methods. This discount rate includes fees charged by the acquirer as well as the “interchange fee” which is predominately paid to the issuer.
FIGS. 1a and 1b diagram a typical credit card transaction. The authorization process occurs first and is shown in FIG. 1a. The customer (100) provides the card or card number to a merchant (110), who submits a summary of the transaction as a request for authorization to an acquirer (120). The acquirer (120) submits the summary to the appropriate credit card payment network (130), which in turn either decides on the card issuer's behalf or submits the transaction to the issuer (140) for a decision. Possible decisions can include “approve”, “decline” (with or without special conditions such as confiscating the card), or “refer” (meaning that the merchant must contact the card issuer or its agent for some reason, e.g. for additional cardholder verification steps or to inform the merchant of special processing requirements). If the card association authorizes on behalf of the issuer then the decision is routed back to the merchant and also to the issuer. If the issuer decides on their own behalf then the decision is routed back through the network to the merchant.
If the transaction decision was to approve the transaction, then the transaction can be processed as shown in FIG. 1b. The merchant (110) completes the sale and submits the complete transaction to the acquirer (120). The acquirer (120) in turn submits the transaction to the credit card payment network (130), which in turn forwards the transaction to the issuer (140) who then posts the activity to the cardholder's account. In some networks, authorization and transaction processing are performed simultaneously using single set of messages.
The reimbursement process typically works in reverse, where the issuer (140) pays the payment network (130) the transaction amount less its portion of the interchange fee (which in most cases is all of the interchange fee). The payment network (130) pays the acquirer (120) the transaction amount minus the interchange fee and any transaction fees it imposes. Finally, the acquirer pays the merchant (110) or the merchant bank the transaction amount minus the merchant's discount (the discount encompassing each of the previously stated fees plus any additional fees added by the acquirer). Payments to participants can be “netted” to reduce the amount of money transferred in the system. For transactions involving multiple currencies, currency conversions can be applied by the card association or other participants.
Several methods for reducing costs for one or more of the participants in the payment transaction are known. Large merchants can negotiate reduced fees with acquiring banks, although the largest component of the discount rate—the interchange fee—is fixed by the credit card network and is therefore non-negotiable. It is also known that issuers can refund a portion of the merchant's discount rate or other fees so that merchants can offer discounts to customers who use the issuer's payment products. It is also known for merchants to offer discounts or refunds to customers who enroll for new payment methods, such as the merchant's own credit card or a co-branded credit card. Card-present transactions involve lower interchange fees, so merchants can try to ensure that the credit card is swiped with each transaction.
Discount Schemes
Although most credit card association rules require identical prices for cash and credit card transactions, some merchants offer discounts to customers for cash and other payment methods. Alternatively, some merchants impose surcharges on customers for paying with credit cards.
Some payment cards include support for multiple payment networks. For example, a typical credit card or debit card might support a major credit brand (e.g., MasterCard) as well as one or more alternate networks (e.g., Cirrus, Star, Interlink, Plus, etc.). Merchants (such as grocery stores) may not support the major brand (e.g., because the discount rate is too high), but may be able to process transactions on lower-cost networks.
U.S. Pat. No. 6,014,635 to Harris et al. describes a credit card transaction discounting system that leverages existing credit card networks' authorization and transaction processing capabilities. The operator of the scheme issues identification numbers to customers, where the identification numbers comply with credit card number formatting standards and begin with a bank identification number (BIN) that can be processed through standard credit card networks. The customer's identification number is linked to a credit card belonging to the customer. When transactions are attempted on accounts with this BIN, the discount system uses the customer's account number to locate the customer's credit card number and performs a debit against that account. In addition, the system posts a credit to the customer for the discount (refund) amount. This approach has several serious limitations. First, there is no clear business model to fund the discounts, since the transaction processing cost includes both the cost of processing the transaction through the credit card network plus the cost of the refund. Also, credit card association rules may prohibit the use of “dummy” card numbers. In addition, although card issuers are responsible for fraud on card-present transactions, transactions using the discount scheme may be treated as card-not-present, leaving either the discount scheme operator or the merchant with higher fees and exposure to risks normally borne by the issuer.
In another known scheme, transactions using a particular payment instrument can be processed using any of several networks. For example, some cards issued for use on ATM networks support transactions processed via a variety of payment networks, such as Star, Plus, Cirrus, etc. Regardless of which network is chosen, the same ATM card is used and the same account (funding source) from the same issuer is debited. Multi-network ATMs use priority lists that rank the supported networks so that transactions will be processed using the most-favored (e.g., lowest-cost) compatible network.
Risk Analysis Systems
Risk analysis systems are used by issuers and other participants in payment systems to evaluate the risk associated with a transaction given knowledge about the account and transaction.
Transaction risk evaluation involves two levels. The first involves “underwriting characteristics,” which are indicative of risk and “goodness” as determined by cardholder information (either for the cardholder as indicated by a credit or fraud reporting agency) or the account (as indicated by the type, current condition, historical evidence and unique characteristics associated with its use). The second group of characteristics is those associated with the transaction, such as merchant information and purchase characteristics. Most risk management systems place a higher dependence on the cardholder and account information, since the issuer is often able to see only simple characteristics of the transaction. (At the point of authorizing a credit card transaction, the issuer usually does not know who the merchant is, may not know the merchant's type, and almost never knows what is being purchased.)
The evolution of automated risk control systems has gone through multiple stages. Early systems did little more than determine whether the account actually existed and if there was sufficient funding available to the cardholder.
More advanced systems were developed to analyze velocity characteristics (such number of transactions in a given period of time), transaction sizes, and whether transactions are for cash (or quasi-cash like money orders) as opposed to “regular” purchases. These filters were then combined with the cardholder characterization to produce static, numeric “scores” assigned to accounts and transactions.
Although these static scores are still the predominant method used in the most situations, more sophisticated scoring methods using expert systems and neural networks are also known. With neural networks, the scoring of transactions and accounts over a multivariate environment is possible. Although such scoring is generally not done in real-time, the scores are updated frequently with weighting changing with each analysis. Historically these systems were used to identify only the risk of a transaction. Recently a few issuers have begun experimenting with the converse, the value of a transaction. Still other issuers generate two measures. The first is the traditional risk indicator, but the second indicates potential value. A composite of this information is then used to determine if a requested transaction should be authorized. A built in impediment has limited the value of these new systems, however: once transaction is entered into the authorization networks, the issuer must provide a binary “yes” or “no” answer. Furthermore, card association rules and certain legal restrictions may prevent the issuer from rejecting transactions if the account is in good standing and there are funds available. As a result, methods for assessing the value of individual transactions cannot be completely utilized in many payment networks because high risk transaction must be accepted if the issuer has no specific evidence that the transaction is bad (such as a bad PIN).
Conclusion
Revenues and profits for issuers, acquirers, and electronic payment networks are often highly dependent on transaction volume. For issuers, methods of the background art (such as advertising to attract new customers and customer incentives to add transactions) are expensive, slow, and have unpredictable effectiveness. The invention introduces novel methods and apparatuses for increasing and/or controlling transaction flow, which may result in improved issuer profitability and/or decreased merchant costs.
Glossary
The following terms have the meanings indicated with respect to the preferred embodiments described below. However, these meanings are exemplary rather than exhaustive, as other exemplary meanings for these terms will be understood from their plain meaning as commonly used in the field of financial transaction processing.
Acquirer: The term “acquirer” refers to the bank, company, or other organization that has the contractual and funds settlement relationship with merchants. Acquirers, either directly or via their agents, are responsible for processing transactions through to the issuer (e.g., via an electronic payment network) and paying the merchant. Examples of acquirers include, without limitation, credit card acquirers and merchant banks that accept checks. The role of the acquirer may involve several different companies or organizations, such as banks, independent service organizations (ISO's), or processors.
Authorization: The term “authorization” refers to both the process and product of the process by which a merchant requests liability protection or other assurances that a payment instrument is valid before accepting a payment instrument to consummate a sale. In many cases, the assurance includes a guarantee by the payment instrument issuer to accept responsibility for payment of the transaction.
Automatic Teller Machine (ATM): The term “Automatic Teller Machine” (or “ATM”) means a cash-dispensing machine. ATMs commonly use a customer's card to identify an account to debit and receive a PIN from the user to verify the cardholder identity before dispensing money.
Cash: Currency issued by a government, or private equivalents.
Chargeback: The term “chargeback” refers to both the process and product of the process that an issuer uses to debit part or all of the value a sales transaction from a merchant based on some violation of rules by the merchant or non-acceptance right exercised by the issuer.
Clearing: The term “clearing” refers to the process of providing accounting details sufficient for the purposes of debiting a cardholder account, and creating net funds positions among issuers, acquirers and merchants.
Computer: A software-controlled electronic data processing device, including without limitation microprocessor-driven circuits, personal computers, mainframe computers, and embedded systems.
Credit Card: A payment card that offers a revolving line of credit.
Debit Card: A payment card that is linked to a funds-bearing account (e.g., a bank checking account) so that purchases are debited from the linked account.
Discount Rate: The difference between the amount of a transaction and the amount paid to the merchant. In the case of credit card transactions, the discount rate includes fees charged by the acquirer plus payment network and interchange fees. For example, a merchant might receive $98.50 from a $100 transaction, corresponding to a discount rate of 1.5 percent.
Electronic payment network: An electronic network that connects issuers and acquirers and enables them to settle transactions. Many electronic payment networks “net” transactions so that each participant pays or receives an amount corresponding to the difference between their total debits and credits through the network for a given time period. Examples of electronic payment networks include VISA, MasterCard, STAR, Carte Bancaire, FedWire, and NACHA.
Issuer: The bank, company, or other organization that issues a payment instrument. The issuer often (but not always) maintains a relationship with the customer, providing account statements and other services. Examples of issuers include without limitation credit card issuers, companies or banks issuing electronic money, banks that provide checking accounts, and governments that issue cash.
Payment Card: Any general purpose payment card (including without limitation smart cards and/or magnetic stripe cards) that can be used by a customer to perform payment transactions. The term payment card shall be understood to include, without limitation, debit cards, cards that offer a revolving line of credit, and cards that do not offer a revolving line of credit. Payment cards can be issued by any organization, including without limitation banks, merchants, savings and loans, card associations, specialty travel and entertainment companies, etc.
Settlement: The funds transfer and disbursement enabled by the clearing record.